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News Article

Troop, Base Realignments Pressure Exchange Changes

By Gerry J. GilmoreAmerican Forces Press Service

WASHINGTON, Dec. 22, 2004  Projected negative economic impact accompanying future realignment of U.S. forces in Europe and elsewhere to stateside bases is a key reason why the military's exchange system needs to become more efficient, a senior DoD official looking into these issues said.

As part of troop-realignment plans, Defense Secretary Donald H. Rumsfeld "is talking about bringing home 70,000 troops from Europe alone" and thousands more from Asia, retired Air Force Maj. Gen. C.J. Wax, head of the Unified Exchange Task Force, said during a recent interview. The task force was formed in May 2003 to effect change across the worldwide military exchange system.

Wax, a former commander of the Army and Air Force Exchange Service, also noted that 3,700 troops and 10,000 family members now stationed in South Korea are returning to the United States.

Since the majority of exchange system profits - 53 percent -- come from overseas store sales, the system must transform its business practices now to become more efficient to sustain the benefit for servicemembers, he said.

Upcoming 2005 Base Realignment and Closure Commission decisions "could be a two-edged sword," Wax said. Some underperforming stores could be closed, he said, while profitable stores could be shuttered, too.

In 2003 there were a total of 293 main military exchange stores in the United States and 153 overseas stores. The reason most overseas stores do well, he noted, is because they have a "unique market" of servicemembers and families who, for various reasons, don't often patronize host-country retail establishments.

Regarding stateside exchange operations, Wax noted that 63 percent of U.S.- based servicemembers and their families today don't reside on a military installation.

That means, "at least 63 percent of our people will end up living closer to commercial retail entities than they do to their (on-post) exchanges," he said.

And, as thousands of servicemembers are redeployed from overseas locales to posts like Fort Carson, Colo., and Fort Benning, Ga., Wax noted, those exchanges will likely require upgrades to keep them competitive with off-post retailers.

At the same time, he said, profitable overseas exchanges will be closed as the U.S. military's global footprint changes to become more expeditionary and troops are deployed to rudimentary overseas base camps for training with allies.

Military exchanges at such camps, Wax noted, will be small in size and likely only carry the most basic of goods. And providing exchange services to U.S. forces deployed to Iraq, Kuwait, Afghanistan and Uzbekistan, he noted, "is very expensive."

All of this "impacts the overall profit equation of our exchanges," Wax pointed out, and necessitates the need to lower costs across the system.

The military exchanges provide an important non-cash benefit to servicemembers, military retirees, and their families, Wax noted. Simply closing exchanges with scant profit isn't the answer, he explained, noting that many are located in isolated areas of the country, such as the Air Force base in Minot, N.D.

For military customers at Minot, Wax pointed out, the exchange store there "is it."

"How do you compensate servicemembers for denying them a benefit?" he asked. It would be akin to denying medical care to servicemembers stationed in North Dakota because such care is too expensive, he said.

The exchange system can't increase its customer base or build more stores to increase sales, Wax said. Therefore, he noted, the only thing to do is to become more efficient. " The exchanges must look at their internal operations for ways to reduce the cost of delivering the benefit," he said.

AAFES, with headquarters in Dallas; the Navy Exchange, with headquarters in Virginia Beach, Va.; and the Marine Corps Exchange, with headquarters in Quantico, Va., combine for more than $10 billion in annual worldwide sales. Two-thirds of that money is earmarked to fund the services' morale, welfare and recreation programs, Wax pointed out. Protecting exchange profit margins, in turn, protects these MWR programs, he noted.

The task force initially thought to combine the services' separate exchange headquarters into one as part of proposed money-saving initiatives. That step, he said, probably won't be necessary. Instead, the organizations' finance and accounting, human resources, information technology, logistics and non-retail procurement systems will be consolidated to achieve savings. Private-sector retailers performed a series of similar mergers of business practices over the last decade, he observed.

Consolidation of business practices across the military exchange system as recommended by the exchange task force will make exchange operations more cost efficient and be transparent to customers, Wax said.

"Once costs go down, profits will likely go up," he noted.

Exchange system reorganization recommendations should be completed by March 2005, officials say. Following a legislative review cycle, measures to streamline exchanges could be implemented during 2006.